Monex: A 1.0 Percent Cut Would Have Been Much Better

Government spending cut adjustment should be established at greater than the 0.7 percent said Carlos González Tabares

Further government spending cut surveyed the impact on the Gross Domestic Product (GDP) will cause the depreciation of the peso and lower oil revenues for its current low price, adjustment should be established at greater than the 0.7 percent, perhaps to 1.0 percentage point, said Carlos González Tabares, Director of Securities Strategy and Analysis at the Monex financial group.

“A cut of 0.7 percent seems to me that at least fulfills our expectations to offset this negative effect, to have lower revenues will mean a lower expenditure, though there will still be some ways to go, to see that indeed this decline in spending is effective, on the other hand it seems that preventive measures of this cut will have an effect in the same year but I worry more next year, 2017,” he said.

González Tabares said that while it is premature to assess the need for further adjustments to spending, thinking about the financial situation of the country the following year, because the behavior of oil prices and the exchange rate is unpredictable, he said that the provision of at least oil prices at low levels, although more stable and the government’s commitment not to raise taxes argues that the authorities shall make that choice.

He also said that in recent years government spending has had little leverage on the growth of the Mexican economy so that the cuts should not impact a great extent.

On the other hand, after the Bank of Mexico (Banxico) unveiled in the report of the 2015 Balance of Payments that foreign portfolio investment declined by slightly less than half compared to the previous year. The specialist added that the country, as well as other emerging nations, is challenged to stop the flow of capital before taking the preference of investors to place their assets in dollars.